Private Equity Firms: Sales Tax Risks in Post-Wayfair World
In 2018 the Supreme Court ruled in the case of South Dakota v. Wayfair, Inc. et al that states have the right to enforce economic nexus requirements on out-of-state sellers. How do these new sales tax obligations impact the financial health of private equity firms?
Previously, sellers were only required to collect and remit sales tax to states if the sellers had a physical presence in that state. Today, states still enforce physical presence nexus but 70% of states also require out-of-state sellers meeting specific sales or transaction thresholds to collect and remit sales taxes on taxable products and services sold to customers in those states, even if the sellers has no physical presence in the state.
Portfolio companies that do not address these sales and use tax obligations could face financial health crises due to penalties and fines imposed by states. Unrecorded liabilities may also have a significant impact on planned acquisitions and divestitures.
Currently more than 35 states have imposed new economic nexus laws. Most of the remaining states are lining up to pass similar legislation. And the penalties facing companies for non-compliance are stiff!
Download Cherry Bekaert’s free charts listing states with economic nexus laws:Companies making taxable sales of products or services in states with economic nexus must begin monitoring these sales to determine if certain thresholds are met. Then processes should be in place to collect and remit sales tax to the states.
Recommendations for Current Portfolio Companies
1) Educate companies about the new requirements
Visit Cherry Bekaert’s sales tax website to read and share information about the new sales tax obligations, including blogs, upcoming webinars and tax alerts.
2) Encourage companies to register and begin collecting tax in states where they have nexus.
If a company makes taxable sales in a state and meets nexus criteria, they need to register. However, if prior exposure exists, companies should determine if past liabilities should be resolved prior to registering, using a voluntary disclosure or amnesty program.
3) Help companies improve sales and use tax procedures
Cherry Bekaert’s sales tax team can review a company’s processes and recommend ways to more accurately and efficiently meet sales tax obligations.
4) Review options for ongoing sales tax compliance
Once registered and collecting tax, the company is required to file sales and use tax returns. Multiple state registrations means filing multiple tax returns. Many companies may benefit from outsourcing sales tax return filings.
How to Make Sales Tax Part of Due Diligence
Sales tax is often overlooked when Private Equity Firms perform due diligence on prospective portfolio companies. Reviewing potential risks from sales tax non-compliance is more important than ever. Consider these recommendations to appraise a company’s sales tax liabilities:
1) Include sales tax nexus issues as part of due diligence
By looking at business activities and sales volumes, nexus can be evaluated as part of the due diligence process. Is the company meeting its current sales tax obligations? Has past non-compliance left the company open to unresolved financial exposure? Scoping nexus issues will identify past exposure issues and determine if current sales tax obligations are being met.
2) Review future compliance obligations
Recommend ways the company can prepare for the new sales tax obligations. Is staff trained to meet these obligations? Do they understand the taxability of their products and services? Can they monitor taxable sales, register with states and complete sales tax returns?
Many companies are facing new sales tax obligations due to the Wayfair decision. Making sure your current and target portfolio companies are ready to address these obligations will reduce the financial risks that Private Equity Firms want to avoid. Start now by sharing this blog: What's Your Strategic Plan to Manage Post-Wayfair Sales Tax Obligations?
Cherry Bekaert can help. Our sales tax experts and private equity team will create a strategic plan based on your group’s portfolio. Contact us with questions or request more information.